Sanctions are back – with a vengeance

Sanctions are back – with a vengeance

The ‘success’ of the latest bout of US sanctions on Iran hinges on third party responses and domestic conditions in Iran. Hassan Hakimian explains

‘The Iran sanctions have officially been cast’ tweeted President Trump three months after he signed an executive order in May announcing the US withdrawal from the Iran nuclear deal. He went on to boast the return of ‘the most biting sanctions ever imposed’, as if sounding the death-knell of the so-called Joint Comprehensive Plan of Action (JCPOA), signed in 2015 between Iran and the P5+1 group of countries.

Although the announcement did not take many by surprise, the irony was not lost on one key observer, Wendy Sherman – the senior US negotiator of the JCPOA – who quipped recently that she had always expected ‘the greatest challenge to the deal’s success would be violations by Iran, not the political machinations of the president of the United States.’

Iran and the US indeed seem to have reversed roles now: Iran’s isolation at the nuclear table in the last round now contrasts with the US swimming against the tide of international opinion. Disappointment, if not disbelief, was quick to come, not least from other counterparts to the JCPOA – the countries of the EU, Russia and China – who swiftly reaffirmed their strong commitment to it.

By contrast, US officials have reiterated the Trump administration’s determination to permanently rein in Iran’s ‘nuclear ambitions’, limit its ballistic missiles programme and scale down its regional influence. By the final stage, which kicks in on 4 November, curiously coinciding with the 39th anniversary of the US hostage-taking in the American Embassy in Tehran in 1979, the aim of the sanctions is to reduce Iran’s oil exports ‘down to zero’.

Given the fraught and long history of economic sanctions in Iran, the question looming now is whether this time they are more likely to be effective – whether in changing the regime or its behaviour.

The last time Iran’s oil exports were reduced to negligible levels through an extensive economic boycott was in the mid-20th century, when the oil industry was nationalised by Iran’s popular Prime Minister, Mohammad Mossadegh. The backlash, a successful blockade of Iran’s oil by major powers led by Britain, turned out to be arguably a textbook ‘success’ story in the history of sanctions. It brought the industry to a virtual standstill, destabilised the economy and deprived the nationalist government of badly needed funds and domestic energy. This paved the way for the infamous US-instigated coup, which restored the Shah to power in 1953. Such has been the hangover from these tumultuous years that it took half a century for Madeleine Albright, the US Secretary of State, to acknowledge in 2000 that the coup was a clear ‘setback for Iran’s political development’ and a basis for ‘why many Iranians continue to resent this intervention by America’.

Such remorse, if it can be considered that, did not, however, close the door on more Iran sanctions. Under Obama, and as a key element of his strategy for ‘engaging with Iran’ during 2010-15, the EU and US unilateral sanctions had mixed results. Under these comprehensive sanctions – also described as ‘the most crippling sanctions in the history of sanctions’ by Joe Biden, the US Vice President – oil exports contracted by two thirds, sinking to below one million barrels a day. The wider macro impact was equally harsh with stagflation setting in: inflation reached a height of 35 per cent in 2013 and GDP contracted by nearly 6 per cent in 2012. Unsurprisingly, the ordinary folk bore the brunt. There was widespread private sector failure and growing unemployment. Ironically perhaps, and contrary to the sanctions’ principal objectives, these years saw the economic and political hold of the public sector and parastatals strengthened. Meanwhile, Iran insisted on its sovereign rights to continue with a peaceful nuclear programme. Things, however, changed after 2013, when Iran’s internal political dynamics gave way to the reformist administration of Hassan Rouhani.

So what is different this time?

Though promising to be even more biting, there are clear differences. For a start, the sanctions regime is not backed by UN Security Council resolutions and thus lacks international legitimacy. This means Iran’s isolation will be far less complete with her key trading partners, such as China and Turkey, already announcing that they will abide by ‘legal’ sanctions only.

To be effective though, the sanctions de facto – and not de jure – status will decide the outcome. This is especially true of the European firms, for whom the battle for secondary sanctions will ultimately be decided in the boardrooms and in cognisance of their shareholders’ interests rather than the political machinations of their home governments. This explains the significant stream of exits from Iran’s markets already announced by large firms. A reminder that in an interconnected world where the US economic sway extends far and deep across the globe, it is hard even for European giants such as Airbus and airlines, energy companies and banks to risk the ire of the US Treasury. Whether we consider the deal bruised or buried, the ultimate success of sanctions is, therefore, likely to depend on how others behave – just as much as on Iran’s responses.

But domestic conditions also play a key role, and this is where the US seems to be banking its hopes for ‘success’.

For months, Iranian cities have been rocked by widespread protests ostensibly against harshening economic conditions. These outbursts have weakened Iran’s reformers by undermining their monopoly on hope. Hardliners, it seems, have been offered a new lifeline and can now claim their disregard for the nuclear deal was justified from the start. The economic impact has been widely felt already, with the Iranian currency going into free fall since speculations about the US nuclear withdrawal kicked in. The spectre of inflation is now back.

Ultimately for sanctions to be ‘successful’ from the US perspective, they must succeed in either bringing about a regime change in Iran or a change in its behaviour. Historically though sanctions have a less than convincing record of achieving regime change (as in Cuba, Myanmar and Zimbabwe).

Can they pave the way for a negotiated settlement? This is yet to be seen, but one thing is clear: the ‘Trump doctrine’ of pushing one’s foes to the brink in the hope that they will blink first is in unchartered waters in Iran.

An earlier version of this article was published by the Project Syndicate website

Hassan Hakimian is Director of the London Middle East Institute and a Reader in the Department of Economics at SOAS. He is President of the International Iranian Economic Association (IIEA) and Series Editor for the ‘Routledge Political Economy of the Middle East’